(11 years, 9 months ago)
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Lord Whitty
“Local Government Schemes: exclusion
Nothing in this Act shall be taken as allowing the Treasury to de-fund any individual fund in the Local Government Pension Scheme or to transfer the fund’s assets to HM Treasury and the liabilities to the ONS national accounts.”
Lord Whitty
My Lords, this is an amendment that reflects some of the anxiety in local government and other circles about what the Treasury’s ultimate intention is in relation to public sector schemes. The Minister may be gratified to know that I do not expect him to accept the amendment wholesale tonight, either in this form or in some other form within this Bill, but I hope that he will give sufficiently reassuring words that the matter dealt with in the amendment is not the intention, and that there will be some way of making sure that it is not.
The anxiety stems from a number of things. We all know that the Treasury likes to control things. We also know that the Treasury does not like to see the possibility of costs that it does not control but that will count against the public borrowing requirement—albeit that that definition is ludicrously wide compared to most other countries. The Treasury also likes to see large sums on the asset balance sheet. On the other hand, the Treasury likes to deal with liabilities on a pay as you go basis rather than on a long-term funded basis. When looking at the attempt to corral the local government scheme into the same box as the unfunded public sector schemes, where the funding has gone up and down significantly over the decades, all these things might suggest the possibility that if any of the 89 different local government schemes were seen episodically to be failing, the Treasury might take the opportunity to step in and take it over, or perhaps to take over large chunks of the local government scheme.
Local government schemes consist of 89 different schemes, mostly local authority. By and large, they are well run, professionally organised and based on very solid professional advice, and generally they take steps to ensure that the income is changed if the long-term prospects alter significantly. But, of course, in the current economic climate there has been some serious turmoil. The local government scheme of which I was recently chair went from a funding position of 114% down to something under 70% and back up again to 90% in the past four years, which was almost entirely due to the way in which the world stock markets have gone down, with the value of equities and other stocks, and also—and I shall return to this in a subsequent amendment—to the way in which liabilities are valued. At times, it looked as if there was danger of those funds not being sustainable even in the short term.
There is a possibility of the Treasury not liking to face the possibility that it is seen as the underwriter of last resort, which currently it is, although I notice that the noble Lord, Lord Flight, who is not in his place, is attempting to remove that position later on in the Committee’s consideration. In reality, there have been no historic examples of default, but nevertheless there could be an opportunity of the Treasury stepping in, saying that the fund is badly run and that it is going to take it over, count the assets against central government assets and push the liabilities into the long grass.
There is a precedent for this situation, and a rather large one—that of the Post Office pension scheme. Both Governments are guilty of this, although the current Government actually implemented it. It was a very large scheme and, because of previous pension holidays taken by the Royal Mail pension fund, it was somewhat underfunded. Somewhat to our surprise, the Treasury agreed to take over the scheme directly. Part of that was to soften people up for privatisation, but another part of it was that it immediately got the Treasury £26 billion on the asset side of their balance sheet, whereas the liabilities, although they are still there legally and contractually and will have to be met, actually disappear from that balance sheet in the general fund.
If that could happen in a scheme as large as the Post Office scheme—and there is the possibility of a predatory Treasury down the line—then it could happen in relation to failing or allegedly failing local government schemes. The reality is that the boards of the local schemes and the national board would need to take steps within the LGPS to ensure that such schemes did not fail, or that if they failed they would merge with other local government schemes. That responsibility to intervene at the first sign of danger rests within the LGPS, not with the Treasury.
There is a serious suspicion that the blurring between an independent local authority-based wholly funded scheme, and this scheme’s provisions for greater Treasury surveillance, could go further, and that it could allow the Treasury to seize control of a local authority fund in the circumstances that I have described, but possibly in other circumstances as well. I have put this amendment down for the resolution of that suspicion. As I have said, I do not necessarily expect the Minister to accept this amendment, but I would like, in the course of either this or the next stage, an unequivocal declaration or a different form of words in the Bill that make it clear that the Treasury would not act in this way in relation to local government schemes. I beg to move.
Lord Newby
My Lords, this amendment seeks to provide assurance that the Treasury could not take away the assets of the pension funds or place the liabilities of the local government pension schemes on to the Government’s books. I hope that I can reassure the noble Lord, Lord Whitty, that the Government have no intention of doing so, and for a very good reason.
The noble Lord, Lord Hutton, considered the funded nature of the local government pension schemes and concluded that they should continue on that basis, and we agree. Local authority pension funds allow local government to manage its liabilities efficiently and ensure the solvency of the scheme both at a local level and as a whole. Moving to an unfunded model in the local government schemes would risk greater volatility in the costs, and therefore the demands on local taxpayers. In practice, taking on the assets of local government schemes would also mean taking on the liabilities, which would have a greater cost for central government and would therefore make no economic sense. Neither would winding up any of the existing funds make economic sense. That would cost the Government far more in making provision to secure annuities for rights already built up than it would gain the Government in terms of assets.
Furthermore, there are significant legal barriers. It took explicit powers in primary legislation to move the pension assets of the Royal Mail. There are no such explicit powers in this Bill. For the avoidance of doubt, any suggestion that the Government took on the pension fund of the Royal Mail in order to improve the figures, knowing as they did that they were incurring a very significant liability in the long term, is simply misplaced. It was, as the noble Lord put it—although I would not put it in quite the same terms—part of the necessary process of preparing the Royal Mail for privatisation.
When debating closure we have said in your Lordships’ House, in another place and outside Parliament that we have no intention of winding up the existing schemes. Indeed, we have amended the Bill on a number of occasions to allay these fears. The Government, therefore, have no intention of defunding the local government pension schemes, for the very good reasons that I have set out.
I hope that I have reassured the noble Lord, Lord Whitty, that any fears that he might have about the LGPS funds are entirely unfounded, and that this amendment is therefore not necessary.
Lord Whitty
My Lords, I thank the Minister for that reply, which provides a fair degree of assurance. I will read the precise words then consult colleagues in local government as to whether that is sufficient. However, I thank him for his reply. I agree that the Post Office was a bit more complicated, but on the other hand there are suspicions out there, and it is part of the distrust to which reference was made earlier that such fears are around. The Government have to ensure that they pacify those fears. I hope that the Minister’s words will help to do that. Meanwhile, I beg leave to withdraw the amendment.
Lord Whitty
Lord Whitty
My Lords, in moving Amendment 33, I will refer also to the other amendments with which it is grouped.
Clauses 4 and 5 provide that scheme regulations must provide for a person to be responsible for managing or administering a public service pension scheme set up under Bill powers, and any other statutory scheme connected with it. In the case of the LGPS, the agreement reached between the unions, the LGA and the DCLG specified the need for a national board, as proposed in the report of the noble Lord, Lord Hutton, in order to give it a national focus in line with the treatment of other public service schemes. The national scheme board would have concerns for the scheme at national level, with a central focus to ensure efficient and effective overall management of the LGPS. Therefore, the LGPS effectively requires two boards—one at the national level and one at the local scheme level—to ensure effective separation of responsibilities.
We need to clarify this. In commitments given in another place and elsewhere, the Government have already attempted to clarify that this would indeed be the case. However, we would like to see the clause amended or strengthened to separate clearly the role of scheme manager and scheme board—that is the other point of these amendments—which would be achieved through Amendments 36 and 44. Separating the roles through these amendments should provide for more robust management of any conflict of interest. As I say, the Government have reassured me to some extent on this point. It is possible that government Amendment 45, which we will come to later, will provide some clarity in terms of the distinction. I will respond to the Minister, if necessary, when we reach that amendment.
Amendment 126 to Clause 23 deals with contributions to other pension arrangements. Clause 23, as drafted, implies that there is an ability for scheme employers to make contributions to private occupational schemes virtually as an alternative to the schemes set up under the Bill. If that were a general power, it could result in scheme employers offering those schemes rather than the LGPS, which would have serious consequences, including knock-on effects on contributions for employers and members of the LGPS. There would also be demands from other employers running separate schemes for crystallisation payments from those who have transferred or did not take up the LGPS scheme. The ability of employers to pay into other schemes is available in exceptional circumstances but this clause as drafted seems to make it a general provision. However, I think that it needs to be available only in exceptional circumstances, as it is under the existing regulations.
Amendment 127 deals with Schedule 8 and revaluation methodology. The schedule contains relatively minor and consequential amendments to primary legislation. Pensions payable by the LGPS are revalued using the scheme set out in the Pensions (Increase) Act 1971. The amendment is required to enable the same methodology to be used for revaluation during service to continue once a scheme member is in receipt of their pension. That would provide the clarification needed to ensure that members’ benefits are revalued correctly in retirement. I beg to move.
Lord Eatwell
My Lords, my noble friend has made some interesting and important points. One of the issues that really need to be faced, on Report in particular, is that in the negotiations that followed the Hutton report, Local Government Employers, the unions and the Government managed to formulate what could be called a “deal” about the way in which pensions were to go forward. Regrettably, elements of that deal do not appear in the Bill. In response to challenges in the Commons, Ministers gave assurances on a number of occasions but, given that this is expected to be a Bill lasting 25 years, covering several Administrations, these assurances should be in the Bill. A deal is a deal and simply going back to assurances is, at least partially, reneging on the deal.
Having said that in support of my noble friend, I will now speak to Amendment 35, which is also in this group. My noble friend Lord Hutton’s report recommends:
“Every public service pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration.”
One can understand why my noble friend recommended this given that, as my noble friend Lord Whitty has commented, there are 89 local government pension funds, with over £150 billion of assets under management, as well as the other pension schemes. Clause 1 currently provides for the establishment of a pension board for a scheme but leaves it completely unclear whether there is a requirement for one pension board for each fund in the Local Government Pension Scheme. Under the clause as drafted, it would be perfectly possible to have one pension board for all 89 pension funds—that is not ruled out. The Minister in another place said the combined effects of Clauses 4 and 5 rule this out. I have studied these clauses carefully and have taken advice, and have been assured that they do not rule this out. Indeed, one could have various combinations of boards servicing the 89 LGPS funds and other schemes.
Given that, as the Hutton report says,
“all scheme members deserve to know that their scheme is being properly run”,
it is entirely desirable to make clear in the Bill that a pension board for each pension fund is a prerequisite, both as a measure of efficient management and to give confidence to the members of individual schemes that they have a board that they can identify with and have access to. I will, in due course, ask the Minister to consider carefully taking on board Amendment 35 to give suitable clarity to what is meant by the establishment of pension boards and ensure that there is a pension board for each scheme.
Lord Newby
My Lords, the noble Lord, Lord Whitty, has proposed Amendments 33, 36, and 44, which are concerned with ensuring that there is a scheme manager and pension board for each local authority pension fund. The amendments also provide for national pension boards in the Local Government Pension Scheme. Amendment 35, tabled by the noble Lord, Lord Eatwell, raises much the same issue.
Both noble Lords seek assurance that there must be a pension board for each local authority pension fund within the local government scheme. I can reassure them on that point. Police, fire and local authorities will be scheme managers in respect of their part of the pension schemes for those workforces. The effect of Clause 5 is that the scheme regulations must provide for a pension board to assist each scheme manager in that role. It follows that there will be a pension board for each scheme manager.
Noble Lords may say that Clause 4 does not in explicit terms require there to be a scheme manager for each local pension fund, and hence a pension board also for that fund, but that is the purpose of Clause 4(5). The intention is also clear from Clause 5(6). This anticipates that the scheme managers of locally administered funds will be the local authority or a committee of the authority.
Amendment 36 is also concerned with requiring national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland.
Lord Eatwell
I ask the noble Lord to return to the point he just made, because it is similar to a point made in another place. There is a scheme manager for each scheme. Clause 5(1) states:
“Scheme regulations for a scheme under section 1 must provide for the establishment of a board with responsibility for assisting the scheme manager”.
That does not suggest that there should be a board associated with each scheme manager. It does not say that, but a board might be just one gargantuan board that serves a variety of scheme managers. I quite understand that the noble Lord is sympathetic on this issue and wishes to assure us that that is what the Government mean but it is not what they say.
Lord Newby
My Lords, that is what we mean and I am advised that that is what the clause says. I will look at it again and if there is any further clarification that I can give the noble Lord, I will write to him. I think that we just have a difference of view about what the current provision states.
Amendment 36 would require national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland. We cannot support these amendments but, as the noble Lord, Lord Whitty, will be aware, we have tabled Amendment 45 to deal with that issue, which we will consider in due course. When we do, I hope that the noble Lord will be persuaded of it.
Amendment 115 concerns Schedule 7, which sets out the mechanism to maintain the final salary link for service in the current schemes. The schedule is designed to allow public servants’ final salary benefits to remain fixed to their final salary on leaving pensionable public service, even after they enter the new schemes. This was a key part of the recommendations of the noble Lord, Lord Hutton, and a vital aspect of the reform deal for public servants. The mechanism also includes provisions for this link to be maintained even if the person moves between public service schemes or leaves public service for periods of not more than five years. Again, this is exactly in keeping with what the noble Lord, Lord Hutton, proposed.
This approach allows public servants the flexibility, for example, to take carer’s leave or gain experience in other sectors, without being inhibited from doing so by the detrimental impact on their final salary pensions. This is consistent with a wider objective to modernise public service terms and conditions, and it smoothes movement between different sectors and departments to enable the sort of skills-sharing that is required for a modern-day workforce. Amendment 115 seeks to remove this flexibility for those in the Local Government Pension Scheme by stipulating that the link is maintained only if the person remains in pensionable service for the purpose of the new local government scheme.
I am not sure that the amendment delivers on its purpose but, none the less, I must oppose it on principle. It would leave in place a movement barrier that we wish to dislodge and be inherently unfair to local government workers. It would lead to the unfair scenario where a teacher who moves to local government for a period before returning to teaching would maintain their final salary link, whereas a local government worker who moves to the education sector before returning to local government could lose their final salary link. That would not be right.
I reassure the House, however, that the Bill does not impose any new liabilities on the funded local government scheme while a person is not in local government scheme employment. Under paragraph 2 of Schedule 7, the link applies only where someone who leaves the local government scheme transfers their rights to benefits from the old scheme, and therefore the liability, to their new employer’s final salary scheme.
Amendment 126 seeks to remove local government pension schemes from the powers set out in Clause 23, which allows pension payments to be made outside schemes that will be established under Clause 1. Although the pensions that will be made under the Bill will continue to be among the best, not every last person working in the public sector will want to be part of them. In these circumstances, it is important that alternative provision can be made so that public servants can continue to save for their retirement, where the scheme manager or employer considers this appropriate. The clause therefore allows for pension payments, or other benefit payments, to be made outside the new schemes to people who are entitled to join the schemes made under this Bill.
An example of an alternative arrangement would be the employer making contributions to an individual’s personal pension scheme where that individual is on a short-term contract and does not wish to be part of the public service scheme for just that short period. This is nothing new across public service schemes as a whole. The power already exists for some of the current schemes; for example, in Section 1 of the Superannuation Act 1972.
However, I recognise that there is some concern, expressed by the noble Lord, Lord Whitty, and no doubt shared by others, that these powers may be used to override eligibility for the schemes that will be established under Clause 1. I can reassure noble Lords that the clause will not allow eligibility for the main scheme benefits to be overridden. The scheme regulations will spell out who is eligible to be a member of a pension scheme made under the Bill. This scheme could not be used to remove these eligibility rights. In short, while this clause could allow alternative arrangements to be offered, where these suit an individual’s personal circumstances, it does not allow schemes and employers to make such alternative arrangements mandatory. I hope I have reassured the noble Lord, Lord Whitty, that any fears he has about the operation of Clause 23 with regard to the LGPS are entirely unfounded, and that this amendment is not necessary.
Finally, Amendment 127 seeks to remove the reformed Local Government Pension Scheme from the provisions of the Pensions (Increase) Act 1971. This Act provides for the indexation of pensions in payment across the public sector. The amendment would mean that the provisions of that Act would not apply to the CARE element of the LGPS, instead, indexation of CARE pensions in payment would be linked to the revaluation of active member benefits, which is provided for under this Bill.
I understand that this amendment has been tabled to overcome a perceived problem with the Pensions (Increase) Act, which creates difficulties for uprating pensions in the year the member retires. However, this amendment is both unnecessary and undesirable. It is undesirable in a piece of framework legislation such as this to carve out one particular scheme for special treatment. This is especially the case when the revaluation of CARE benefits in the year of retirement is a calculation that will have to be made by all the new CARE schemes established under the Bill.
Furthermore, it is unnecessary. I am pleased to be able to reassure the noble Lord that the Government already run a CARE scheme: the Nuvos section of the Principal Civil Service Pension Scheme, which makes provisions for civil servants. This issue was addressed when that scheme was introduced, and is dealt with via the scheme rules. Should the noble Lord care to look at the detail of this, I refer him to rule C.9—the retirement index addition—in the 2007 rules for the existing civil service scheme. The reformed schemes set up under this Bill, including the LGPS, will also be able to overcome any technical difficulties with appropriate provisions in scheme regulations. There is no need to make any further provision in the Bill to allow them to do so.
With these reassurances, I hope that the noble Lord will feel able to withdraw this amendment.
Lord Whitty
My Lords, on that last point, I should be grateful to receive a letter or note from the Minister or his department because that is different from what is understood by those who currently administer the scheme. I agree that it is a minor point but, as a minor point, it should really be dealt with in the scheme regulations rather than in the Bill. Therefore, if the noble Lord would be good enough to let me have more detail on that, I should be grateful.
I have a similar point to make in relation to payments into other schemes. In all the circumstances that the Minister referred to, I am in favour of what local government schemes already do, which is to provide for payments into other schemes for the purposes of temporary absence, short-term contracts and all sorts of other things. However, that is not part of the scheme; it is an arrangement between the individual and so forth. The fear or concern about Clause 23 is that it is written in very general terms. It is written as though a local authority or the pension manager thereof could, as a matter of course, offer an alternative parallel scheme to the local government scheme, which would undermine the finances of the local government scheme. I can envisage circumstances where that might happen. That does not mean that there should not be provision for somebody who wishes to invest in a different scheme themselves, and of course there will also be the complication of automatic enrolment. Therefore, there are circumstances where the current situation allows employers to invest in other schemes, which they do. My concern relates to the generality of the clause and I should be grateful if the Minister could have another brief look at that.
As far as the main amendments in this group are concerned, like my noble friend Lord Eatwell, it seems to me that if the Government mean that there should be two levels of board in a local government scheme, they should say so and make that quite explicit. Of course, there is an additional problem if this matter is left vague. If there is a national scheme, then what happens at local level could vary. There is another problem which I think probably exists in the current local government scheme to some extent because it is unclear. There should be a clear separation between the employer as the employing authority and the body and personnel that deal with the management of the local scheme. That is required by the private sector regulations under the Pensions Act and by the European directive. If what goes on at the second tier is left vague, there is the possibility that the employing authority will simply decide that it will also be the administrator of the scheme. If it is a committee of the authority with clear powers, that is a different matter, and that is often the case with local authority schemes, but there has to be a differentiation. I fear that if we do not spell out in the primary legislation that that is the structure that we are looking for, then a range of possibilities could ensue at the local level.
I have also looked at Amendment 45, which seems to deal with some of the anxieties behind the non-stipulation of a two-tier board scheme, but it does not deal with all of them. I am also somewhat mystified by the fact that the amendment refers to an “advisory board”. What we and the Hutton report are looking for is a governance board, and to call it an advisory board immediately dilutes its potential role. I could not find a lot wrong with the wording of the proposed new clause in the amendment but the heading made me feel that it did not fulfil all that I was hoping for from the Government. Perhaps the noble Lord could ask his officials to get in touch with me and with the LGA to provide some clarification on this front. In any case, I would advise him to be clearer in the terminology in relation to the two boards. However, for the moment, I beg leave to withdraw the amendment.
Lord Sharkey
“(1) Scheme regulations for a scheme under section 1 must provide for the establishment of a board, at least one third of whose members must be members of the scheme or their representatives, with responsibility for assisting and making recommendations to the scheme manager in relation to the following matters.”
Lord Sharkey
My Lords, this amendment has two purposes. The first is to put into the Bill the requirement that pension boards have at least one-third of their members who are members of the underlying scheme. The second is to make certain that these pension boards universally have some influence and are not entirely to be emasculated by the scheme regulators. The drafting of the Bill leaves the exact powers and responsibility of the boards to be defined by the scheme regulators, saying only that the boards are to assist the scheme manager. As I said at Second Reading, the word “assist” is virtually meaningless in this context and that is why this amendment also gives a board the explicit power to make recommendations to the scheme manager.
The question of scheme members being members of their scheme’s pension board should not be controversial; as the noble Lord, Lord Eatwell, mentioned a moment ago, recommendation 17 of the report of the noble Lord, Lord Hutton, says explicitly that every public service pension scheme and individual LGPS fund should have a properly constituted, trained and competent pension board with member nominees. The Government agree with this principle. In Committee in the Commons, the Minister said that Lord Hutton recommended that each pension scheme local board should have a pension board and the board should include member representatives. We agree.
Lord Hutton, on pages 125 and 126 of his report, explains what factors led to this recommendation. He notes that there are currently boards where members are sometimes not formally represented. He notes with approval that the majority of local authorities have some form of member representation in their governance arrangements. However, he also noted that it seemed that only a very small minority of member representatives had full voting rights. He quotes evidence given to his commission by UNISON that,
“by 2009 only seven of the 89 England and Wales Fund authorities had allowed voting by scheme members of pension committees”.
That is not representation, that is tokenism. It is still tokenism even after Government Amendment 40 in this group. All this amendment does is to require that members of a scheme must be represented on the scheme’s pension board. It is entirely silent about the size of this representation.
This whole issue of size of member representation on pension boards was discussed in some detail at Committee stage in the Commons. There, Chris Leslie proposed an amendment that would have resulted in one-third of pension board members being scheme members. The Government declined to agree. The Minister said:
“There is no objection in principle to having scheme-member-nominated representation on pension boards. That is our policy. Our objection is to applying a private sector standard to the public sector schemes without considering whether that is appropriate given the different structures and contexts of public schemes. Unlike the private sector, the public schemes span large work forces and multiple employers”.—[Official Report, Commons, Public Service Pensions Bill Committee, 8/11/12; cols 267-68.]
This refers to a provision in the Pensions Act 2004; Section 241 of this Act requires pension boards in the private sector to have at least one-third of their members to be members of the underlying scheme. The Minister’s arguments, that what the private sector is forced to do by statute is not appropriate as a statutory provision for the public sector, seems to me to be on very weak ground. I would specifically ask the Minister to explain in detail why we can happily have a one-third rule in statute for private pension schemes but not for public pension schemes.
In the Commons, in Committee, the Government attempted to resolve the argument over the size of member representation in part by saying:
“I can tell the hon. Gentleman that for various schemes, there is already extensive work going on draft schemes and draft policies … Once he sees that, he will see that a lot of the concerns that he understandably has about representation will be addressed”.—[Official Report, Commons, Public Service Pensions Bill Committee, 8/11/12; col. 269.]
The Minister said he was happy to release some of those drafts. Could I ask the noble Lord the Minister to make those drafts also available to this House to help us in our deliberations? It may be that, as Sajid Javid said, these drafts will in fact help. But until we can see and discuss them, I think that the Minister must explain from first principles why it is wrong to guarantee significant member representation on pension boards by writing this requirement on to the face of the Bill. I beg to move.
The Deputy Chairman of Committees (Lord Colwyn)
My Lords, if this amendment were to be agreed I could not call Amendment 35 due to pre-emption.
Baroness Donaghy
My Lords, I identify with every word that the noble Lord, Lord Sharkey, said on that issue. In doing so, I shall speak to my amendment about the European directive, which is related to the structure and governance of schemes. In view of the time, I shall give the short version because it is a rather technical issue.
Of course the European directive was intended to have a minimum EU-wide standard for security of benefits, but that was not its sole objective. It was also aimed at improving standards of management and allowing pension fund schemes to play a full part in investment markets. All funded schemes should meet these objectives whether government guaranteed or not.
On the question of legal separation, at present the funds in England and Wales of the Local Government Pension Scheme are not legally separated. They are under the control of the councils that administer them. Most are run by a council committee under local authority legislation. On the issue of the Local Government Pension Scheme meeting the requirements of Article 18, the article states:
“Member States shall require institutions located in their territories to invest in accordance with the ‘prudent person’ rule and in particular in accordance with the following rules … The assets shall be invested in the best interests of members and beneficiaries. In the case of a potential conflict of interest, the institution, or the entity which manages its portfolio, shall ensure that the investment is made in the sole interest of members and beneficiaries”.
Therefore, the Local Government Pension Scheme has its own investment regulations. They do not contain any requirement to the effect of the prudent person rule or to invest in the best interests of scheme members and so are non-compliant with the directive in this respect.
Let me make clear that I am not making any outright criticism of the Local Government Pension Scheme. It has been well run and has the trust of its members. I am aware, of course, that the Minister has said that, in his view, the Government are already fully compliant with the directive. The previous Government, which implemented these articles, also believed that they were fully compliant. I simply make the point that I do not think that is entirely accurate.
The investment regulations of the Local Government Pension Scheme do not contain any requirement to the effect of the prudent person rule or to invest in the best interests of scheme members and so they are non-compliant. Even with the benefit of the directive’s existing legal framework, which is not present in the Local Government Pension Scheme, Parliament has seen the need to provide further protection for members’ interests in particular by requiring the appointment of member-nominated trustees or trustee directors, imposing obligations to provide information to members, requiring trustees to be informed and trained so that they understand their responsibilities, and requiring trustees to appoint professional advisers, whose duty it is to act only for them in situations where there may be a conflict of interest with the employer imposing restrictions on the amount of permissible investment in the employer.
The position under the Local Government Pension Scheme, as matters stand, is completely different. The equivalent of the trustee is the administering authority, which is likely to be a major employer in relation to the fund it manages. Not only that, all decisions taken about investing the fund are taken by councillors, officers and employees of the administering authority or representatives of other employer bodies. There is no provision in the legislation which replicates the duty that trustees owe to their beneficiaries. On the face of the legislation as it stands, therefore, there is nothing to stop the administering authority from taking decisions on investments which prefer its interests and the interests of other employers over the interests of members of the Local Government Pension Scheme. My amendment is therefore necessary to ensure that reform of the Local Government Pension Scheme should address the provisions of the IORP directive.
Lord Eatwell
My Lords, before speaking to the amendments in this group tabled in my name and that of my noble and learned friend Lord Davidson of Glen Clova, perhaps I may associate myself most heartily with the words of the noble Lord, Lord Sharkey. That should not be surprising as the first part of my Amendment 41 is virtually exactly the same as his amendment, but I must say that he put the argument beautifully. The idea that one could not accept the notion that one-third of pension board members are nominated by members of the scheme seems extraordinary. One-third is a lower limit which should certainly be accepted.
On the pension fund board which I have the honour of chairing there is one independent member; namely, myself. Otherwise one half of the remaining members are nominated by the members of the scheme and the other half by the employer. It is just under 50% because of one independent member. If that can be the case in what is, I hope, a harmonious pension scheme, I do not see why it cannot be appropriate for public sector schemes. The argument that the public sector is widely spread over different locales and can cover lots of different activities is clearly spurious as a private scheme for a very large company would be doing the same thing. That is the argument which was presented in another place, but it has been dismissed by the noble Lord, Lord Sharkey, and he was absolutely right to do so. It really has no substance at all.
I shall deal briefly with the amendments tabled in my name. Amendment 38 is all about transparency and effective governance. Under Clause 6(2)(c) pension boards are obliged to publish information about,
“matters falling within the board’s responsibility”.
As we can see in Clause 5(2), these include compliance with a whole series of aspects of the scheme’s regulations, whether it be an unfunded scheme, a defined contribution scheme or, indeed, a funded scheme with respect to its investment strategy. All the amendment seeks to do is ensure that the financial information associated with the running of the scheme is available to the board members so that they can comply with the requirements set out elsewhere in the Bill. If they do not have all the financial information they need, how can they fulfil the responsibility of ensuring that the scheme complies with regulations and other legislation relating to governance? Surely having knowledge of the financial structure and oversight thereof is key to this. We learnt from the Financial Services Bill that oversight does not mean control of but simply access to information about, so if this Bill is to be consistent with that Bill, oversight here would mean access to information that will allow the board to fulfil its responsibilities.
Amendment 39 similarly is devoted to transparency and requires that a policy governing the appointment of board members should be published. High quality board members are absolutely essential if public service pension schemes are to be well run. It is vital that the process for appointment is clear and well considered. It is therefore important that this is a transparent process so that members are reassured as to the quality of their board members. This will also promote fairness in appointments. Given that under Clause 5(4) scheme managers have an obligation to ensure that board members do not have any conflicts of interest, a clear and open appointment process with established criteria for appointment will aid scheme managers in fulfilling that statutory obligation. All Amendment 39 does is say, “Publish your policy on your appointment so that everybody knows what the criteria are, how they can apply, and so on”.
Regarding Amendment 41, I have already referred to the part which deals with the one-third of board members, and the noble Lord, Lord Sharkey, has put it better than I could. Amendment 41 also includes the requirement that there be one independent member. It is enormously valuable to have independent members, who often have professional expertise, to assist on pension fund boards. The report of the noble Lord, Lord Hutton, made it clear that it would be desirable for pension boards to have independent members. The amendment seeks to ensure that the recommendation of the noble Lord, Lord Hutton, is taken into account.
Finally, Amendment 42 uses exactly the same definition of member nominee and independent board member as the Pensions Act 2004 and provides for a nomination process for board members. In that respect, it simply mirrors the Pensions Act 2004, and in particular mirrors the definition of an independent board member, referring specifically to the nature of their independence. The criteria set out in Amendment 42 are those which we have already accepted for the private sector, and it seems entirely appropriate that they should fit here. These amendments are to provide transparency, which will enable the boards to do their jobs better. Transparency over an appointments process and a nomination process will enable the boards to be better constructed.
Lord Newby
My Lords, I begin by speaking to government Amendment 40. It deals with matters related to those that have been raised by the noble Lords, Lord Sharkey and Lord Eatwell. Amendment 40 delivers the Government’s policy commitment for scheme members to be represented on pension boards. Our amendment explicitly requires scheme regulations to provide for members of a public pension scheme, and any connected scheme, to be represented on the pension board. Unlike the amendments proposed by the noble Lords, Lord Sharkey and Lord Eatwell, it does not specify a proportion of board members that must be member representatives, nor does it say how member representatives are to be appointed to the pension board.
The noble Lord, Lord Sharkey, asked whether draft regulations could be made available to Members of your Lordships’ House. I confirm that we will make them available to all Members who have spoken in the debate today. In our view, these matters are rightly left to scheme regulations. In their amendments, the noble Lords have broadly sought to replicate the requirements that relate to boards of trustees in other occupational pension schemes. Amendments 34 and 41 seek to adopt the requirement for at least one-third of board members to be members or their representatives in trust-based schemes. Amendment 42 seeks to adopt a similar process for nominating member representatives to the board.
The noble Lord, Lord Sharkey, asked me to explain our rationale from first principles. I am not sure whether I shall go quite that far back, but I will attempt to explain it. We believe that the amendments fail to recognise the major differences between the public service pension schemes and the trust-based schemes that these provisions were designed for. For example, the effect of Amendment 42 would be to require Norfolk County Council to allow every member of the local government pension scheme in England and Wales, directly or indirectly, to participate in the selection of member representatives to their pension boards. The same would apply to each of the other 88 funds in the Local Government Pension Scheme. This is clearly unintended but it serves to highlight the fact that the public service schemes are indeed different. A one-size-fits-all process for nominating member representatives to pension boards would not, in our view, be appropriate, nor is it appropriate to set a quota. The public schemes are not directly comparable to trust-based pension schemes. The public service schemes are significantly bigger than most occupational pension schemes and many involve multiple and diverse employers. For example, there are over 5,000 employers in the LGPS in England and Wales. Those are not just local councils but also local charities and housing associations. That broad range of interests needs to be represented on the public service pension boards too.
Consequently, our view is that imposing a requirement for one-third of pension board members to be members, or their representatives, could lead to them being the largest interest group on the pension boards. Of course this is not an issue in private sector schemes, where there is often only a single employer to accommodate on the trustee board. The Bill already provides the necessary flexibility for the details to be agreed in each scheme, following consultations with members and other interests. This approach will allow the pension board membership to be tailored to the varying structures of each of the public schemes. The pension boards will then be able to appropriately reflect the range of employees and employers in each scheme. We believe that this is the right approach.
One of the other amendments in the name of the noble Lord, Lord Eatwell, relates to public pension boards having an independent member. The noble Lord, Lord Hutton, did indeed say in his report that it was important that pension boards include independent members. Although we accept that independent members can play a role in pension boards, we do not see a case for mandating each pension board to have such members. The reasons for mandating independent trustees in the private sector do not, in our view, flow through to the public sector schemes. Independent trustees reinforce the separation of pension schemes from the employer in the private sector and, as we have discussed previously, we are not convinced that this is required in the public scheme.
Amendment 39 would require a scheme manager rather than scheme regulations to determine the policy governing the appointment of pension board members. Clause 5 provides that it is the scheme regulations that would provide for the establishment of a board. Within that, schemes are likely to set out the detail of a board appointment process in the scheme regulations. If schemes determine to delegate this matter to scheme managers, then scheme regulations could require the scheme manager to publish these matters. It would be wrong for the Bill to prejudge the outcome of scheme-level discussions about how to best constitute and appoint pension boards in each of the schemes.
Having said that, we agree with the sentiment of the amendment. Pension boards must be transparent and representative of the interests of stakeholders, both members and employers. That is why Clause 6 already requires the publication of details of pension board membership and the board’s responsibilities.
In responding to Amendment 37 from the noble Baroness, Lady Donaghy, I hope she will not mind if I repeat what I said at Second Reading: the Government believe that the Local Government Pension Scheme,
“is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits”.—[Official Report, 19/12/12; col. 1586.]
I am well aware that Unison has long argued that the scheme is not compliant with the European directive, and I recognise that it feels strongly on this issue, but we simply do not agree. The reasons why have been set out in a number of letters from Ministers to Unison over the past five years, not just the past two.
The previous Government implemented EU directive 41/2003 through the Pensions Act 2004. As that Act relates to the governance and administration of pension funds, that legislation is therefore already within the scope of Clause 5(2). I assure the noble Baroness that Amendment 37 is therefore not necessary. I hope that she will feel reassured and not press it at the appropriate time.
The final amendment in this group is Amendment 38, tabled by the noble Lord, Lord Eatwell. This amendment was considered in another place and resisted on the grounds that its application would be inappropriate. One of the key concerns that we have with this amendment is that it seeks to give the pension board of a funded scheme responsibility for the oversight of investment management. The existence, performance or level of any local authority pension fund has no bearing on the benefits that members receive.
Lord Sharkey
I thank the Minister for the promise to give us sight of the draft scheme regulations; that might be very helpful. I continue to believe that it is a mistake to leave the number of member representatives to the scheme regulations. Who protects the interests of the scheme members as the regulations draw up the plan for these boards? Consultation does not do that. Consultation is very well and fine and should take place, but it does not necessarily protect the interests of the scheme members.
I also wonder what mechanisms will prevent or cure the non-voting tokenism identified in evidence by the noble Lord, Lord Hutton. I find that I am unconvinced, on the whole, by the Government’s responses on this issue. It is clear, however, that there is substantial concern in the Committee about this whole area and I expect that we shall return to the question on Report. In the mean time I beg leave to withdraw the amendment.
Lord Newby
“( ) requiring members of the scheme and any connected scheme to be represented on the board.”